How the Stock Market Works

The stock market is one of the most traded in the world, offering thousands of opportunities to invest and profit from ongoing price movements. It is easy to get started if you have plenty of initial capital you are looking to invest in any kind of company, but it is vital that you understand how the stock market works to enhance your chances of profiting.

Technology has changed the way in how the stock market works, with most investors using an online platform to buy and sell shares rather than a stockbroker. The basic principle of buying low and selling high remains, but for beginners, there is more to how the stock market works than that.

What is a Stock?

A stock is a share of a company. When traders buy a stock, they are purchasing a small piece of that business and essentially becoming a part owner. Investors who buy a share of stock are then entitled to a small portion of the assets and earnings of that business, based on how many stocks they own.

Companies float on the stock exchange and allow stocks and shares of their business to be sold as a way of raising money. This is referred to as equity financing. The company uses the money raised through selling stock to grow its business while shares continue to trade on the stock exchange.

Determining Stock Price

The price of a stock is first determined based on how much the company is estimated to be worth and how many shares are issued. However, once this has been set, it can then change in price regardless of the company’s actual success, as supply and demand begin to have an influence over prices.

There are various reasons that certain stocks become desirable, from a strong industry performance to recent successes, while poor sector and company performance will result in a lower stock value. All companies listed on a stock exchange must publish their accounts and often trading statements, which can lead to price fluctuations based on the reaction.

Buying and Selling Shares

Along with traders profiting from buying stocks and shares low before selling them for a higher price, another important aspect of how the stock market works is through dividends. A dividend is what a company pays out to its shareholders from its profits, per share held, and usually, this is done once a year, but not by all companies.

It is important to stay on top of market news and events to help inform your decisions when buying and selling shares. When businesses are underperforming or experiencing industry uncertainty it can be a good idea to sell shares, while buying shares in companies that are making good profits or within a well-performing sector is also advisable.

With a better understanding of how the stock market works, you will be better set to begin buying and selling shares here at Sharp Trader.